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US housing market is cursed by brain freeze.

Byline: John F. Wasik, Special to Gulf News

If you are buying or selling a home in a market glutted with distressed properties, it's time to change your attitude.

Don't be misled by pundits saying the bottom may be visible in this stultifying decline. The real-estate recession will continue unless a massive brain freeze thaws. Buyers are afraid of purchasing a home at the wrong price while millions of sellers are locked into unrealistic listing prices.

Some good news after almost three years of deterioration is welcome, of course. In the latest S&P/Case-Shiller Home Price Index of 20 major US cities, values fell 18 per cent in April. That pace was slower than forecast.

That's cold comfort as the collective psychology of the US home market has been short-circuited for some time. We are largely hostage to the way our mind works. According to prospect theory, pioneered by psychologists Amos Tversky and Daniel Kahneman, the idea of losing money is a much more powerful motivator than a gain.

Our brains are telling us it's painful to price our homes to reflect 20 per cent to 50 per cent losses in market values. So buyers overprice houses and wait for something to happen.

A myopic, loss-averse view of the market, for example, means listing for $500,000 (Dh1.84 million) or more when comparable upscale homes are selling for $400,000 or less.

Our loss-aversion fears are so powerful that they override our logic circuits. We tend to ignore economic reality because we are emotionally anchored to our homes and values based on boom-era prices. It's like holding on to a favourite stock long after it has tanked.

There are also influential cerebral centres for optimism and self-confidence. We hang on to properties, falsely believing that prices will rebound to the bubble years of 2005-2006.

Actual market conditions don't offer much hope, however. "Real house prices have fallen by more than 30 per cent from their peaks in 2006, destroying more than $6 trillion in housing wealth," writes economist Dean Baker in his Housing Market Monitor.

How do you succeed in this market? When you are selling, take into account all market conditions.

Forget listing prices that you are anchored to; in most places, homeowners have lost equity that may not be restored, especially if unemployment is rising. The only way out may be a short sale for less than the mortgaged amount.

What are comparable homes actually selling for and how much discounting moves a property? Are there foreclosures in your neighbourhood, which will necessitate even more discounting?

Reframe your pricing decision. Focus on the benefits instead of seeing a price as loss-inducing.

Will you get out of an unaffordable mortgage payment? Will your property taxes drop by moving? Buyers, in contrast, should beware. There are still too many reasons to wait before you jump into this market.

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Publication:Gulf News (United Arab Emirates)
Date:Jul 10, 2009
Words:496
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